First Mover Advantage

What is it?

First mover advantage describes the benefits that a company will gain if it is the first competitor into a certain market or to launch a certain new product or service. It rocketed to popularity in the Internet “land-grab” years, when companies invested crazily to be the first into virgin e-territory, driving metrics like “cost per eyeball” and relying on the first mover advantage to create future profitability.
Strong network effects can be a major first mover advantage, which explains why e-Bay has never been able to catch up in Alibaba in China or Yahoo in Japan
However, as most of the Internet companies found out, first mover advantage is no substitute for a profitable business model. It is only sustainable where there are unique positions or assets that the company can lock-in – the best partners, the best shopping malls, patent protection, supplier exclusivity for example. Weaker competitive advantages based on the learning curve or brand awareness are unlikely to make a difference on their own.

Some very successful companies adopt a “Fast Follower” approach, whereby they wait to see how the pioneer does, then enter avoiding their mistakes before they have acquired unstoppable momentum

One way to consider how significant first mover advantage might be is to assess the rate of technology change and how fast the market changes. First mover advantage is greatest in “Calm Waters” when the initial technology investments will pay off in the long term and you will not need to chase customers as their needs change.

First Mover Advantage matters least in “Rough Seas” when early movers will need deep pockets to keep up with technology and customer changes. Your early commitments, sunk cost and mindset may well prevent you from adapting to the market changes fast enough, causing a First Mover’s Disadvantage.

An Example?

Consider the evolution of the social media space. Friendster was overtaken by MySpace which was overtaken by Facebook, which might have been overtaken by Instagram and WhatApp if Mark Zuckerberg had not bought them. This is a classic example of “Rough Seas” with the market and the technology changing fast.

Netscape’s first mover advantage was not much defense when Microsoft targeted them with superior resources of customer distribution and OEM relationships.

How do you do the analysis?

The key question is to analyse what the future barriers to entry will be in the market. If future barriers to entry are high, first mover advantage will be significant:

How high are switching costs for customers? You can get a first mover advantage if you can lock customers in during the growth phase of a market.

How important are emotional brands? It is a great advantage if your brand becomes the verb for the new category – Googling, Hoovering or Twittering

How significant is the experience curve? This is not as important a source of first mover advantage as it used to be, since know-how is quickly shared by outsourcers, consultants and the web.

Are there any proprietary assets you can lock up? Can you get IP protection, can you lock up key locations, distribution channels or suppliers?

Is there a significant network effect that will improve your value proposition as you grow?

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How can you adapt this concept?

This is linked to the concept of disruptive innovation. In effect, by making an innovation disruptive, you are extending your first mover advantage against the incumbent, whereas sustaining innovations will have little first mover edge.